Editorials

Can Nintendo Defy History?

For better or for worse, Nintendo views the market differently than its competition. Sony and Microsoft have a "winner takes all" approach. Microsoft and Sony are willing to lose money or break even on hardware sales. They rely on bulk software sales and software licensing for profits. To them, the company with the most consoles sold controls the market and becomes the defacto winner.

Nintendo has a knack for cutting hardware costs. Nintendo typically has a more successful and aggressive first-party publishing program than its competitors, and third-party publishers complain that its licensing programs are skewed against them.

In the early nineties, when Sega and Nintendo shared a virtual 50/50 split of the market with Genesis pulling a slight lead, Nintendo was the more profitable of the two companies. In 1999 and 2000, as the last generation of games limped to its conclusion, Sony's PlayStation business dragged while Nintendo still turned a profit on Nintendo 64.

"At this point, the GameCube business is still profitable," says Taylor. "At the current sales price of $149, most people are convinced that Nintendo is still making money on the hardware. It remains to be seen if a price move lower is going to impact profitability or not."

Sega and Atari may have dropped out of the market after similar drubbings, but Nintendo, with its eye on profitability, is perfectly poised to continue the fight.

"There are still millions of systems and hundreds of millions of games left to be sold in this generation," says Llewelyn. "This is not to say that we are not working on our next system."

The NES dominated back in the day.

Unfortunately, Nintendo's cautious handling of the market could pave the way to even worse predicaments. With the exception of Virtual Boy, Nintendo has profited with all of its hardware systems, but its profits and market share have dropped with every generation.

The Nintendo Entertainment System virtually ruled the market with a 90 percent share. Through most of the 16-bit generation, Nintendo and Sega had a 50/50 split (except in Japan where Sega was largely ignored). Sony wrestled away more than 60 percent of the market during the last generation of games. Now Sony and Microsoft control nearly 80 percent of the market.

The GameCube business is still profitable, but Nintendo cannot afford to give up more of its market share.

The good news is that Satoru Iwata, who recently replaced longtime Nintendo President Hiroshi Yamauchi, acknowledges this situation. Yamauchi kept his eye on the bottom line. Iwata seems to be eyeing future bottom lines with increasing apprehension.

Keys to Survival and Advancement

Nintendo may have had a bad fiscal year, but it ended that year with a bang. GameCube sales may be disappointing, but the release of Game Boy Advance-SP was an uncontested success.

Nintendo projected the shipment of 15 million Game Boy Advances worldwide in fiscal 2003; it shipped 15.7 million. Game Boy Advance-SP sold through well enough that the company projected an optimistic 33 percent bump in sales for 2004. Nintendo claims it will sell a combined 20 million Game Boy Advances and Game Boy Advance-SPs by April, 2004.

The Wind Waker also woke some GameCube sales.

GameCube also ended the year on an up-note. Bolstered by the release of The Legend of Zelda: The Wind Waker and new sales promotions, GameCube sales jumped last month. In some stores, GameCube sales even passed those of PlayStation 2.

"We started when we launched our bundle program and saw a 110 percent jump in sales," says Llewelyn.

"All of the things that Nintendo did in the month of March worked out well," concedes Taylor. "The release of GBA-SP, Zelda, and Pokemon all were pretty successful. What was a concern is what will drive hardware sales once the Zelda-effect wares off. It's hard to identify what will be the silver bullet in the portfolio next year."